Make Trade Policy Strategic, Not Dogmatic

Like discussions of the proper relation between state and market more generally, discussions of trade policy particularly are often beset by an unfortunate form of bipolar disorder.

Where state and market are concerned, people seem sometimes to become doctrinaire and extreme. Some seek to shrink “government” to as small a size as possible, even to the point that they can “strangle it in the bathtub.” Others, particularly in earlier times and distant places, have advocated the “socialization” of even the smallest, least dysfunctional sectors of their economies.

The error of the first extreme is of course that it elides almost entirely over the host of collective action problems and other “market failures” to which decentralized exchange economies are prone. Credit-driven price inflations, underinvestment in critical public infrastructures and other determinants of long-term growth potential, the externalization of accidents, pollution, and other business costs upon uninvolved third parties … all of these are cases in which multiple acts of individual rationality can aggregate into collectively irrational outcomes. Hence they are cases in which well-targeted exercises of collective agency – i.e., of governance – actually afford critically necessary backdrops for more productive exercises of individual agency. Yet doctrinaire government-haters, who speak of “government” as if it were an external, alien imposition rather than us – we, the people – acting in our oft-necessary collective capacity, lack the conceptual repertoire to address such challenges.

The error of the other extreme where state and market are concerned – that of wishing to socialize everything – is the photographic negative, so to speak, of the first error. It treats all problems, not just collective action problems and other market failures, as matters to be addressed only collectively. That is a mistake for a number of reasons, chief among them probably (a) that in general, the more overlap between those who make decisions and those who are affected by them, the more sensible those decisions are likely to be; and (b) in general, wider spheres of individual autonomy make, all else being equal, for more informed decision-making and fuller development of personalities and civilizations alike.

Because the historical wisdom of our society has been to favor pragmatic experimentation over dogma, and critical rationality over unthinking sloganeering, our economy has generally been described by observers as “mixed.” It allows for collective decision-making in connection with bona fide collective action problems, and for individual decision-making in connection with more purely individual problems. The upshot is not only a happier, healthier, and more productive economy, but even a broader sphere of autonomy for each individual citizen too. For if you don’t collectively address bona fide collective action problems – e.g., that of financing a military in the event of a looming invasion, or that of maintaining monetary stability in an economy dependent on a stable medium of exchange – then you shrink the sphere of individual freedom itself. (How free are you if we’re successfully invaded, or if you cannot plan your finances because you don’t know whether there’ll be a price inflation or debt deflation in future?)

Given that we as a society have successfully settled upon the mixed economy idea, and given that this has through history tended, with occasional glitches, to serve us well, one might have thought we’d have decided on some form of mixed trade policy too. After all, much trade aids virtually everyone, such that there’s little or no reason to impede it, while some trade either harms long-term interests or benefits some at the expense of others. The natural response to that circumstance, one would have thought, would be to regulate some trade quite carefully while allowing other trade free rein. That would be the fitting trade “microcosm,” so to speak, of the mixed economy “macrocosm.”

But this isn’t what we see. Instead we find dogma – generally unexamined dogma – all over the place. Consider, for example, the “free trade” orthodoxy. This comes in both “high church” and “broad church” forms. The high church form trades on the old Ricardian idea of “comparative advantage.” The thought here is that if country A is much better at producing good 1 than at producing good 2, then it should import some or all of good 2 from some country or countries B – even if A is better than B at producing both. For this will allow A to play to its strength and accordingly produce much more in aggregate, some of which it can then trade for good 2. This is a straightforward and familiar argument, essentially an entailment of the observation that there are gains to be had from specialization and a robust division of labor.

But there is a flaw in this argument when it is taken for gospel rather than for a tendency that can sometimes be exploited. The flaw is this: comparative advantage is not always – indeed it is seldom – a product of mere fate, about which we can do nothing. The most important cases of comparative advantage in a modern economy are the product of choice. They are the upshot of deliberate strategy.